Though it is struggling to stay alive, Corus Bankshares Inc. of Chicago gave two executives $125,000 bonuses this month.
The money was meant not to reward them for the company's performance, but to keep them around.
The $8.4 billion-asset Corus is one of a handful of troubled companies that have given executives incentives to stay. Others include Vineyard National Bancorp in Corona, Calif., and the now-failed Downey Financial Corp. in Newport Beach.
"If you are a bank that is having problems, one of the most devastating things that can happen is to lose key people," said Walter G. Moeling 4th, a partner at Bryan Cave LLP in Atlanta. "It is imperative for banks to try and retain their employees when they are in trouble or trying to raise capital."
Experts say the bonuses would not go to those who put the companies in peril, since regulators likely ordered those people out. Instead, the intent is to retain those tasked with cleaning things up, or at least keeping the companies from collapsing.
Retention bonuses are not new. In better times healthy companies paid such bonuses after deciding to sell themselves.
However, the bonuses are becoming more common among community banks whose very survival is in question. Observers say one reason is that since buyers are so scarce in these risk-averse times, keeping people who know a company best for the duration becomes that much more important.
"I think it is possible that we will see retention bonuses become an emerging trend, sadly," said Susan O'Donnell, a managing director at Pearl Meyer & Partners LLC, an executive compensation consulting firm. "As we see an increase in the number of bank failures, and to the extent that regulators need successful transitions, the bonuses may emerge as a more common practice."
Richard S. Cupp, a turnaround artist, said he did not need to use "stay bonuses" on his most recent rescue attempt, the $1.7 billion-asset Capital Corp. of the West in Merced, Calif. (Regulators seized its County Bank on Feb. 6.) But he also said that he has used them in the past, and that they can play a critical role in a company's ability to stay afloat.
"You want your really important people just there," Mr. Cupp said. "You want people to worry less about their jobs and worry more about the enterprise."
Regulators have restricted capital deployments for struggling banks, and some have been ordered to raise money or face failure. Nevertheless, the regulators seem to support payments designed to keep people in place.
On Nov. 7 the Office of Thrift Supervision approved a $77,500 retention bonus for Brian E. Cote, executive vice president and chief financial officer of the $12.8 billion-asset Downey. The bonus, equal to three months of Mr. Cote's base salary, was paid up front and required Mr. Cote to remain with the company until May 10. Less than three weeks later regulators seized Downey's bank.
The OTS and the Federal Deposit Insurance Corp. did not respond to requests for comment. A spokesman for the Office of the Comptroller of the Currency said whether it approves retention bonuses for a bank's executives depends on the circumstances. If the bank is undercapitalized, there is a statutory restriction on any bonuses, the spokesman said.
Mr. Moeling said he has worked with at least five troubled banks in the last year and a half that have offered bonuses, including the $2.5 billion-asset NetBank Inc. in Alpharetta, Ga., which failed in 2007. (ING Bank of Wilmington, Del., assumed the deposits.)
In that case, the bonuses went not to top executives, but to the technical staff members intimately familiar with NetBank's online banking platform, Mr. Moeling said.
"The online banking part stayed very strong to the end, even when it became fairly clear that there wouldn't be a private-money solution," he said. "The transition to ING went very well. Had they not had those retention bonuses in place, it could have been a fiasco."
Kevin Jacques, a professor and chairman of the finance department at Baldwin-Wallace College in Berea, Ohio, said preventing such fiascoes during failures is likely why regulators approve of the cash payouts.
Prof. Jacques, a former OCC regulator and a former Treasury Department economist in the George W. Bush administration, said bonuses were discussed during interagency committee meetings in about 2004 as a way for regulators to mitigate problems if a megabank failed.
"As regulators, we don't know the banks as well as the bankers do," he said. "In the case of a failure, we want to make that transition seamless and positive for the depositors. We don't want to set in motion any action that causes a panic."
The method was designed to help regulators deal with the failure of highly complex institutions, Prof. Jacques said, but he could see it being useful in marketing efforts by regulators and companies to sell teetering community banks.
Early last month the $2.2 billion-asset Vineyard, another company that is struggling to raise capital to stay in business, entered a retention agreement with Donald Pelgrim, its chief administrative officer. According to a filing with the Securities and Exchange Commission, Mr. Pelgrim will receive a $37,500 bonus, paid in three installments throughout the quarter, in exchange for his "continued employment." No further details about the bonus were provided, and Vineyard did not return a call for comment.
Prof. Jacques said there are fewer healthy and willing buyers than there used to be. Those that are shopping would prefer not to take on an institution that is going to require sorting through questionable assets and present a struggle to integrate platforms, he said, and having important people around makes it a better deal.
According to Mr. Moeling, that's the reason the chief financial officers, with their detailed knowledge of what a bank has in its portfolio and where the problems lie, are most likely to get a retention bonus.
"The CFO might be the most critical person alive in the last months of a company," he said. "A CFO leaving may just be the kiss of death. They hold the key to a successful operational transition."
Even absent a retention bonus for the CFO, a bank can still go to some lengths to keep that person involved.
The $766 million-asset Team Financial Inc. of Paola, Kan., followed up a November warning that it could fail with a December announcement that critical employees, including the executive officers, would be paid a bonus between 0.25% and 2% of their annual base pay for continued employment.
"The program was adopted because the company's ability to perform certain critical functions is dependent on the successful retention of various key employees," Team Financial said Dec. 16 in an SEC filing.
However, Team Financial's capital has been thinning (see related story), and whether it followed through with the program is unclear. Bruce Vance, who had been its CFO since April, agreed to remain a consultant after he resigned Feb. 17. When reached at his home last week, Mr. Vance said he never received a retention bonus. He would not comment further.
Mr. Moeling said the trick is to retain those whose services are definitely needed. That may include chief administrative or operational officers and even branch managers, he said; the CEO, chief lending officer, and lenders likely would not receive incentives to stay.
Corus, for its part, disclosed its agreements with Michael E. Dulberg, its CFO, and Randy P. Curtis, an executive vice president, in an SEC filing this month.
"The board of directors of the bank recognizes that the continuing challenges of the bank and the company are a distraction to the key employee and can cause the key employee to consider alternative employment opportunities," the filing said. "It is in the best interests of the bank, the company, and their respective stockholders and constituents to ensure that the bank will have the continued dedication of the key employee in addressing the challenges the bank and the company face."
Corus agreed to pay the bonuses up front if the executives would stay on until Aug. 1.
Ms. O'Donnell said she considers these bonuses a valid tactic, though they could become a self-fulfilling death sentence. "My feeling is that once you put a retention bonus out there, you are saying you are in a temporary situation."
She cited Corus' decision to commit its executives to staying until August. "I don't really know this company, but if I were an investor, I would be reading that as if they are giving the bank about six months," she said. "I think they shot themselves in the foot with the retention bonus."
Daniel Cardenas, an analyst who covers Corus and previously covered Team Financial for Howe Barnes Hoefer & Arnett Inc., said retention bonuses are a marker of a dire situation, rather than an accelerator of it.
"I think given all the issues that those companies are dealing with at the moment, they just feel the need to keep the key people in place," Mr. Cardenas said. "Your people are just as much a component of the bank as the deposits and loans are. There is no bank if there is nobody there to run the place."
Others agreed that the bonuses appear to be more pragmatic than hopeful — less about rescuing a bank than about keeping things on an even keel in the final hours, when regulators could show up to seize it on any given weekend.
That is likely why most retention bonuses are paid up front, Mr. Moeling said. In the case of troubled banks, "nobody wants to get caught on a Friday."